Sometimes, even if what you bought is legally collateral on a debt, you can just write off and not pay the debt yet keep what you bought.

For the last 3 blog posts we’ve been talking about those relatively rare situations when in bankruptcy you can treat a secured debt as an unsecured one. This is rare because generally liens are NOT discharged—written off—in bankruptcy. A secured creditor’s right to enforce the lien normally survives bankruptcy.

As a result most of the time you have only two choices with a secured debt in bankruptcy. First, you can keep whatever asset of yours upon which the creditor has the lien. But then you have to pay the debt. Or second, you can surrender the asset with the lien to the creditor. Then you can discharge the debt.

But sometimes you can have your cake and eat it too—keep the asset and pay nothing.

This happens in two situations that we haven’t covered before:

There is a legally valid lien but the creditor chooses not to enforce it.

You, or the creditor, or both, believe that the debt is secured by a lien on the asset, but you learn the creditor actually does not have a legally valid lien.

We’ll cover the first of these today, and the second one in an upcoming post.

A Lien Not Enforced

Why would a creditor not pursue an asset in which it has a lien? It wouldn’t do so out of the goodness of its heart. If a creditor can get back some of the money it lost in a debt discharged in bankruptcy by enforcing its lien in your asset, generally it will.

A secured creditor would not enforce its lien generally when the time and expense in doing so is not worthwhile. Often it’s not worthwhile because the asset in which it has a lien has a low market value. That may be the case even though that asset may have a comparatively high value to you.

Here’s an example of this.

Low Market Value

Certain consumer goods by their nature have a very fast rate of depreciation. If you buy a laptop computer or tablet for $500, within a month it’s worth close to nothing. Why? First, people don’t want to buy a used computer/laptop because it’s almost impossible to verify that it doesn’t have a hidden virus or malware. Second, technology advances so fast that these kinds of electronics become obsolete very quickly. Third, as a result there is not much of a market for used electronics. A creditor would not be able to get hardly anything for it once it goes through the time and expense of taking possession of it.

So a creditor with a valid lien on your laptop/tablet may very well do nothing if you file a Chapter 7 “straight bankruptcy” case. In that case you would have to acknowledge that the debt was secured by the item if indeed it is. But you may simply not hear from the creditor asking for surrender of the laptop/tablet. And you may never hear from the creditor ever again after its debt is discharged a few months later.

The creditor is just being practical. Why should it waste its employees’ time to get ahold of the laptop/tablet and sell it if virtually no money can be gotten out of it?

Creditor Using Its Leverage

However, a pushy creditor could see this all differently. Although this kind of asset has such low fair market value, it may be worth very, very much to you. You’ve put software that you like on the devise. You’ve got it configured the way you want it. It has data in its memory that’s important to you. You could transfer all that to another devise, but you now likely don’t have the money or credit to buy another one. And even if you could buy another one, getting the new devise up to speed would involve hours and weeks of your effort. A creditor could use that as leverage to make you pay the debt, or at least part of it.

How can you tell the difference between these two kinds of creditors? How do you know whether you’d have to pay for a debt in order to keep an asset like this? And if you’d have to pay something, how could you minimize how much you have to pay?

Creditors tend to have policies one way or the other. Your bankruptcy lawyer deals with these creditors every day and is very likely familiar with the policies of your creditors. He or she will advise you about appropriate tactics to meet your goals.

Also, creditors candidly understandably take advantage of people who file bankruptcy and don’t have a lawyer representing them. They can use their leverage much more effectively against someone who isn’t fully informed about the pertinent legal issues, and doesn’t know when or how to push back.